IRA LLC Operating Agreement: Provisions and Prohibited Transactions

An IRA LLC operating agreement is the contract that lets a self-directed IRA invest through a limited liability company while keeping the arrangement legal under federal retirement rules. It has to name the IRA as the sole member, appoint you as an uncompensated manager, and build the prohibited transaction rules of Internal Revenue Code Section 4975 into the document itself. Those provisions are not boilerplate. If they are missing or violated, the IRS can treat the entire IRA balance as distributed, with income tax and a possible 10 percent penalty on top.

What the Agreement Has to Do

The checkbook control structure puts a single-member LLC between your IRA and its investments. The IRA owns 100 percent of the LLC, and you serve as the LLC’s manager. Because the IRS treats a single-member LLC as a disregarded entity for income tax purposes, the LLC’s assets remain IRA assets for tax purposes.¹

The operating agreement formalizes that arrangement. It names the IRA custodian (using “For Benefit Of” language) as the sole member and owner, then appoints you as the non-compensated manager with authority to open bank accounts, sign contracts, and direct investments. Once the custodian funds the LLC’s bank account, you can write checks and wire money without waiting for custodial approval on each transaction. The Tax Court validated this basic structure in Swanson v. Commissioner, 106 T.C. 76 (1996), holding that an IRA’s ownership of an entity did not by itself create a prohibited transaction, provided the account holder’s only benefit came through the IRA’s accumulation of assets for future distribution.

That last point drives everything the operating agreement must say. Every dollar of profit has to flow back to the retirement account. The moment you personally benefit from LLC assets outside of a legitimate IRA distribution, the tax treatment collapses.

Required Identifiers and Provisions

Drafting the agreement requires specific identifiers that link the LLC to the retirement account. Getting these wrong causes delays during the custodian’s review and can hold up funding.

Member designation. The sole member is the IRA, not you personally. The standard format is the custodian’s legal name, followed by “For Benefit Of” (FBO), your name, and your IRA account number. This wording appears on your account opening confirmation or a recent custodial statement.
Manager designation. Your full legal name and current address. The agreement must specify that you serve without compensation.
LLC name. Must match exactly what appears on the articles of organization filed with your state. Even a minor discrepancy between the two documents can stall custodian approval.
Employer Identification Number. The LLC needs its own EIN, which you obtain from the IRS using Form SS-4. This can be done online and typically takes minutes.²
Initial capital contribution. The dollar amount the IRA will transfer to fund the LLC. This must come from the IRA, not from your personal funds.

The agreement should also include dissolution procedures, specify how successor managers are appointed if you become incapacitated, and outline how assets are distributed if the LLC winds down. These provisions may seem premature at the start, but custodians often require them before approving the document.

Prohibited Transaction Language

The most important provisions are the ones that prevent prohibited transactions under IRC Section 4975. These rules exist to ensure IRA assets benefit only the retirement plan, not you or your family in the present. The statute bars several categories of dealings between the plan and any disqualified person:³

Buying or selling property. The LLC cannot purchase assets from you, sell assets to you, or lease property to or from you.
Lending money. The LLC cannot lend you money, and you cannot lend money to the LLC.
Providing goods or services. You cannot provide services to the LLC in exchange for compensation, and the LLC cannot furnish goods or services to you.
Personal use of assets. You cannot use any LLC asset for personal benefit. Buying a vacation home with LLC funds and staying in it, even briefly, violates this rule.
Self-dealing by a fiduciary. As manager, you cannot use LLC income or assets for your own interest or receive compensation from any party for transactions involving the LLC.

These restrictions are absolute. Unlike a typical LLC operating agreement where members can negotiate perks or management fees, an IRA LLC agreement has to prohibit all of the above. Your agreement should restate these prohibitions in clear terms so they work as a built-in compliance checklist every time you consider a new investment or expense.

Who Counts as a Disqualified Person

The rules do not apply only to you. They extend to a defined group of “disqualified persons” who cannot transact with the LLC. Under IRC Section 4975(e)(6), family members who qualify as disqualified persons include your spouse, parents, grandparents, children, grandchildren, and the spouses of your children and grandchildren.³ The list also includes any fiduciary of the plan, any entity providing services to the plan, and any corporation, partnership, or trust in which disqualified persons hold 50 percent or more ownership.

Absent from that family list: siblings, aunts, uncles, and cousins. An IRA LLC can, in theory, buy property from your brother without triggering a prohibited transaction under Section 4975 alone. The IRS still watches these deals closely, so arm’s-length terms and independent valuations matter even for technically permitted family transactions.

What Happens If the Rules Are Broken

The penalty is not a fine. Under IRC Section 408(e)(2), the IRA ceases to be an IRA as of the first day of the taxable year in which the violation occurs. The entire account balance is then treated as if it were distributed to you at fair market value on that date.⁴ You owe ordinary income tax on the full amount, and if you are under age 59½, an additional 10 percent early withdrawal penalty applies on top.⁵

In dollar terms: if your IRA LLC holds $300,000 in assets and you make a single prohibited transaction in March, the IRS can treat the full $300,000 as a January 1 distribution. At a 24 percent marginal tax rate plus the 10 percent penalty, that is $102,000 in taxes and penalties from one mistake. This is the single biggest risk in the checkbook control structure, and it is the reason the operating agreement’s prohibited transaction language is not something to skim past.

The Collectibles Prohibition

Beyond restricted dealings with people, the LLC also cannot invest in certain types of property. Under IRC Section 408(m), purchasing a “collectible” with IRA funds triggers an immediate deemed distribution equal to the cost of the item. Collectibles include artwork, rugs, antiques, gems, stamps, coins, alcoholic beverages, and any other tangible personal property the IRS designates.⁴

A narrow exception applies to certain U.S.-minted gold, silver, and platinum coins, state-issued coins, and bullion meeting minimum fineness standards, but only if a qualified trustee holds physical possession of the metal. Storing gold coins in a home safe, even if the LLC bought them, violates this requirement.⁶ The operating agreement should reference the collectibles prohibition so the manager has a clear reminder before committing LLC funds to any tangible asset.

Loans Must Be Non-Recourse

If the LLC will ever borrow to buy property, the agreement should reflect one hard limit: any loan the LLC takes on must be non-recourse, meaning the lender can seize only the property itself if the loan defaults. You cannot personally guarantee an IRA loan, because doing so would be an extension of credit between you and the plan, which is a prohibited transaction under Section 4975.³ Non-recourse lenders for IRA real estate exist, but they typically charge higher interest rates and require larger down payments than conventional mortgages. Debt-financed property also generates a slice of taxable income inside the IRA under IRC Section 514, roughly in proportion to the loan balance against the property’s adjusted basis.⁷

Signing, Custodian Review, and Funding

Once the agreement is drafted with the correct member designation, manager appointment, and prohibited transaction provisions, you sign it as manager. Most custodians also sign in their capacity as representative of the IRA member, though some only require a copy for their files. Keep the original signed version and provide a high-resolution digital copy to the custodian.

The custodian will review the document to confirm the language satisfies their internal compliance requirements and federal law. This review can take a few days to a few weeks depending on the institution. Once approved, the custodian facilitates the transfer of IRA funds into the LLC’s dedicated bank account. Wire transfers typically clear within a few business days; ACH transfers may take slightly longer.

Do not sign any contracts or make any investments through the LLC until the funds have fully cleared in the LLC bank account. Acting early creates a situation where you may be personally liable for commitments the LLC cannot yet fund, and personal liability for an LLC obligation is exactly the entanglement the entire structure is meant to avoid.

1
Internal Revenue Service. Single Member Limited Liability Companies
2
Internal Revenue Service. About Form SS-4, Application for Employer Identification Number
3
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Investments in Collectibles in Individually Directed Qualified Plan Accounts
7
Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income